If this economy has you thinking about using credit cards for the cash back bonuses, you may want to think twice. Using credit cards effectively can be beneficial because you are earning money on the stuff you would normally spend anyway, but it can be dangerous and make you think you have more money than you actually do. In order to protect you from going into large amounts of consumer debt, consider these five do’s and don’ts when it comes to credit cards.
Credit Card Don’ts
DON’T Treat credit cards as a loan – The last thing that you want to do when it comes to using credit cards is to treat them as an easy-to-qualify-for loan. If you are wondering how to pay for college or any other major expense, you should consider other options first. While I always tell people to avoid debt of any kind, credit card debt is one of the worst because it is often the highest interest rate. That means you are most likely paying more money if you don’t pay off your credit card each month than if you were to get a regular loan.
DON’T Spend Money that You Don’t Have – Similar to thinking that a credit card is a type of loan, don’t spend money that you don’t have right now. It may be tempting to buy something on credit because it feels like you are cheating the system, but it’s not worth it. Buying things without the money in your savings account can lead down a dangerous path. Before you know it, you will be in a lot of debt with no way to pay it off.
DON’T Get Store Credit Cards for Small Discounts – Opening up several store credit cards for 10% savings on your purchase is not always going to be worth it. It’s important to remember that credit cards affect your credit score and opening up too many credit cards can actually hurt it. More importantly, if you find yourself with too many credit cards, it will be hard to keep track of fraudulent charges. It’s possible for someone to get a hold of your credit card information even if it’s not being used. Paying close attention to your statements is the only sure way to protect against this.
DON’T Give Your Credit Card for Someone Else to Use – Whether you authorize it or not, giving your credit card to someone else to use is against the law. While most cashier’s do not check ID these days, you never know when someone will ask for ID and I would hate to think what would happen if you were caught using someone else’s ID.
DON’T Forget that Credit Cards offer More Protection than Debit Cards – Whether you realize it or not, credit cards companies often have a department to follow up reports of fraudulent charges. If your credit card is stolen and charges are made and if you report them quickly enough, my past experience tells me that it’s likely to be removed. It’s not always guaranteed, but much more likely than with your debit card, which offers very little protection other than your pin number.
Credit Card Do’s
Pay off Your Statement Each Month – Essential to reaping the benefits of reward credit cards is paying off your statement each month in full. Otherwise, the interest that you are paying will cancel out any benefits you are getting from the rewards. Paying off your bill each month makes sure that you stay out of debt as well.
Track Your Spending – While credit card statements can be helpful to monitor your spending, it doesn’t mean there will never be mistakes. I always look closely at my credit card statements each month to make sure that I actually approved those charges. I’ve only had one charge that wasn’t supposed to be there in my entire life – but that is one more than I approved. Make sure to be diligent!
Pay Attention to Changes in Agreement – If you own a credit card, the credit card company will send you updates on the contract that you have with them. They have the right to change the terms of the agreement (within certain limitations) as long as they notify you of the changes. If you don’t pay attention, you could miss something important, like extra money. This happened to me. I missed an update where my credit card company was changing the cash backs reward system. It used to be that if you waited until you had $200 in cash back, they would give you an additional $50 to make it $250. After a year of using my credit card, I finally got around to cash out my rewards, expecting over $250 in cash, but they changed the policy just weeks before. This mistake essentially cost me $50.
Make Sure Annual Fee (if any) is Worth it – Some credit cards have annual fees. While I generally avoid these credit cards, there are some that will be worth the fee to some specific people. For example, there are several credit cards with travel perks that have an annual fee. The benefits that these cards have are sometimes worth more than the annual fee. If you do choose to have a credit card with an annual fee, make sure to make sure the perks are worth what you paying in the annual fee.
Enjoy the Cash Back Rewards – If you do use your credit card for every day purchases responsibly, make sure to enjoy the cash rewards. Taking the time to monitor your spending and be intentional with what card to use when takes a lot of work. You deserve to treat yourself for being persistent and using the rewards is a nice way to do that. My wife and I save around $400 from using reward credit cards each year and we use it to supplement our vacation fund.
What’s other advice you would recommend for people using credit cards?
This post was written by Corey, a staff writer from Passive Income to Retire. He writes to help people get a handle on their finances and have their dreams come true.